Tag Archives: Federal Income Taxes

Do you know what you need to be aware of when it comes to tax planning and bankruptcy?

The date of the first result found in a search of Google for “2015 tax year planning” is January 22nd of this year. That is pretty early, considering that the end of the year is less than two months away as I write this. There is still time to make sure that you prepare before the opportunity to take actions that might help you this year is gone.

What do I need to be aware of when it comes to tax planning and bankruptcy?

  • Most important: file all of your tax returns on time if you possibly can.
  • Second: avoid under withholding or under payment of your quarterly tax obligations.
  • Third: if you are in a Chapter 13 plan, and you owe more than $1,500 in taxes for a year after the filing of the case, you pay your tax debt off quickly if you possibly can. If you cannot, please come in to see me for a consultation. Read on to learn more about the steps that we may decide to take later in this article.

In this article, we will primarily cover tax-planning advice that is applicable to most people, regardless of income or assets.

Tax Return documents

Higher Contribution Limits in 2015 are Accompanied by Limits on IRA and FSA Rollovers

Investopedia summarized “Five Tax Law Changes in 2015 You Need To Know”  that apply to savings plans, including IRA, 401(k), and Flexible Savings Accounts for healthcare. Most of the news is good; limits have been raised on contribution to retirement savings plans. However, employees are now limited to a single IRA roll over in any twelve-month period. And If you have a balance in your FSA at the end of 2014 and you carry over $500 of it into 2015, you will be ineligible to participate in a HSA in 2015. This restriction does not apply to FSAs for specific uses, such as dependent care or dental expenses.

The IRS Lays out Changes in 2015

The article, “In 2015, Various Tax Benefits Increase Due to Inflation Adjustments”, lists changes in bullet point form, including tax rates, deductions, and exemptions. These inflation-based increases mean that you will keep more of your money, or be able to claim higher level of deductions than in previous years.

What do These Changes Mean? Ideas for Action this Year

While most of these changes are generally good news, they do not eliminate the requirement to file federal income taxes.

  • If you are in the midst of a bankruptcy filing, or if you are in a chapter7, chapter 13, or chapter 11 plan, then according to IRS Publication 908, Bankruptcy Tax Guide, the Bankruptcy Code requires a debtor to file an individual tax return, or request an extension. If this does not happen, the bankruptcy case can be converted or dismissed.
  • In addition, the bankruptcy trustee is required to file an estate tax return, form 1041, for the bankruptcy estate. However, this is usually not a concern to the vast majority of my clients, as it usually involves “big” cases
  • In the case of a Chapter 13 bankruptcy, the debtor pays disposable income into a monthly “plan” to pay creditors. In this case, you as the debtor are obligated to file your taxes on time, and, if you are directed to do so, to provide your returns to the trustee along with any refunds for payments to creditors during the bankruptcy repayment period.
  • There are a number of other helpful articles and resources on my website. This article, “How to Prepare and File your Federal Income Taxes for Tax Year 2014” contains a number of recommendations and resources that are as applicable today as they were when originally published on my site. If your concerns are more technical in nature—for example, on the tax consequences of property sales during foreclosure—I wrote a series of articles that are available on my site here.

Tax planning in bankruptcy can be complicated for some, but not most, of my clients. Remember the most important point I mentioned at the beginning of this article:failure to file your taxes on time can lead to new problems that you will have to deal with.

If you are in a Chapter 13 repayment plan with my firm, and you owe the IRS money for a year after the year in which you filed Chapter 13, you must file your return on time, and then come talk to me. We need to let the Chapter 13 Trustee know that you are facing an obligation, and that you going to see a professional to get into a tax repayment plan. For some people, we might even be able to lower the Chapter 13 plan payment a little while you are in a repayment plan for the taxes that you incurred.

If you find any of this confusing, please make an appointment to come in and discuss your situation. We are here to help you through your bankruptcy—before, during, and after the filing and completion of your case.

We’re With You. All the Way Back.

I have compiled a record of service to my clients that is based upon my determination to be of help to them long after their case is over. Most of the articles on my site and the newsletters I’ve authored contain financial planning advice, including those linked above. The newsletter archive is posted on my site in case you would like to review previous editions at a later time. I am both proud and humbled by the comments my clients say in person and the reviews they’ve freely left about my staff and I on the web. I am committed to helping my clients resume their lives on a solid footing—all the way back after bankruptcy.

Winning Ways to Distribute Your Tax Refund

If you’re receiving a tax refund for tax year 2012, or any tax year, congratulations! The government is refunding the no interest loan that you made in that tax year. Your refund may be small, in which case you deserve congratulations again for not making too large a loan to Uncle Sam, or it may be larger, in which case it may make sense to review your withholding options.

Those topics are for another day. Let’s take the case of the typical taxpayer.

Tax Return documents
In 2012, for the 2011 tax year, taxpayers received a tax refund that averaged $2,700. That’s more than a month’s worth of income for two thirds of US taxpayers.
So, what would you do if you received an extra month’s pay?
I agree with most personal finance advisors who recommend that you pay yourself first. The one thing that you can count on is the need to save for events in life that you didn’t count on. You may not have planned for an event that involves an unexpected expense, but if you have a savings plan, you have better options than someone who has no plan.
OK, so how much of the refund should I save? Let’s pick $1,000.
Here are some ideas—winning ways—to make that payment to yourself.
1.       Make savings a habit. Start a Roth IRA. If you don’t qualify yourself, consider opening one for a family member. If you or your family member had taxable income for the year (even if no tax was due or paid), you can usually contribute up to $5,000.00 into a Roth IRA. The Tax Code provides that this contribution will grow tax-free year after year. What’s more, it can be withdrawn penalty free and tax-free after the person who owns the Roth IRA reaches age 59 1/2. Even if financial troubles occur in the future, the money in the Roth IRA is virtually unreachable by creditors, even if you or your loved one has to file for bankruptcy.
2.       Create a personal financial emergency fund. Set up a separate savings account for this purpose at a bank or credit union. Financial planners recommend that this fund cover three to six months of your typical living expenses. Most employers’ payroll systems can help you set up a paycheck allotment or auto-deposit of $100 monthly into your emergency fund. In just two years, your fund will grow to nearly $5,000.00.
3.       Get a professional financial review. If you feel that you might have enough income for some modest retirement counseling, then get a professional review of your finances from a fee-only non-commissioned financial advisor. You should expect to pay less than $1,000.00 for your personal review, leaving the balance to allocate as your advisor recommends. How is this different than calling Edward Jones or Charles Schwab?  There is a big difference: your local stockbroker is a salesperson, not a truly neutral financial advisor. Contact the National Association of Personal Financial Advisors for a local referral.
4.       Invest in your home. Whether you concentrate on a specific room in your home—the kitchen, a bathroom, the family room—or spread your efforts inside and out, you can make noticeable improvements by doing it yourself. Not only will you enjoy living in your upgraded home, you may find that the home improvements you made improved the resale value of your home should you need to sell your home someday.
5.       Invest in yourself. Some people may not like it, but those who “dress for success” usually do succeed more than someone with the same skills and personality who don’t pay attention to their appearance at work and socially. The book at the link was originally published in 1975. The advice is just as good today as it was then. Don’t overspend though. Limit yourself to $500, and follow the guidelines in the Dress for Success book or other business-friendly sources. You can always upgrade your wardrobe again after you get that big raise because you showed your bosses that you take your work, and your appearance at work, seriously.
If you feel your wardrobe is covered, there are other good ways to invest in yourself—your skills, your mind and body, even your creativity.
6.       Extend the life of your car. The tips at the link helped one car owner keep his machine running for 3 million miles. Keeping your car running well, and avoiding major expenses—like purchasing a replacement car—is a great way to save. If you already do a great job of maintaining your vehicle in tip top condition, you may want to treat yourself to a great detailing job for the exterior and interior. Tacoma’s own Griot’s Garage has great tips and videos that will help.
7.       Hire a lawyer. There are events in life that require professional advice and services. You’ve seen several of them in the 6 winning ways I covered above. A lawyer can help you author key documents that establish plans that cover events in life that many of us don’t want to think about, but must be addressed sooner or later. Starting with a will to simply cover the division of your assets, nominations of a guardian to care for minor children, care for pets upon your passing, “health care directives” to instruct health care providers about how you want your care handled under certain circumstances, and finally, directions for the division of “non-probate” assets such as life insurance policies, IRAs and 401k’s and “probate assets” such as homes and realty investments in your will. Your lawyer can help you ensure that your wishes are clearly established in a will that will help your loved ones avoid surprises and unnecessary stress that your family after your passing. If you divorce your spouse someday, the same lawyer who helped you establish your will is in a great position to help you to address any changes to your beneficiary designations as a result of your divorce.
You or someone you know may want to turn over a new leaf, and implement one or more of these ideas. Great! However, if indebtedness is too great, you may need to take steps to deal with that past debt before you can return to positive net financial worth. If you can’t see a way clear to paying off your debts in full within two years, filing a bankruptcy case can often quickly restore your creditworthiness and put you back on the path towards a brighter financial future. Call us at (253) 383-1001, or visit our site:washingtonbankruptcy.com/contact-us, to schedule a free personal consultation with me so that I can explain how and why. Don’t wait; stop procrastinating! Act now to regain your peace of mind right away.